Can Punitive Damages be Awarded for Breaches of Contract?

Facts

PH Hydraulics & Engineering Pte Ltd (PH) and Airtrust (Hong Kong) Ltd (Airtrust) entered into a Sale and Purchase Agreement (SPA) for PH to design and supply a Reel Drive Unit (RDU) to Airtrust. The RDU was then to be leased by Airtrust to a third party, Trident Offshore Service.

PH and Airtrust agreed that PH was to obtain full certification by ABSG Consulting (the ABSG certification) to ensure that the design and manufacturing of the RDU conforms with certain codes and standards.

The RDU broke down during its operations. Airtrust discovered a number of problems with its design and manufacture – and sued PH for breach of the SPA.

In this regard, Airtrust argued that PH had acted fraudulently in securing the ABSG certification by providing false information and data to ABSG for the certification process. Airtrust also argued that PH had acted fraudulently in misleading Airtrust into thinking that it had obtained full ABSG certification when only partial certification was obtained.

Airtrust sought punitive damages on the basis of the "reckless, dishonest and/or fraudulent conduct" of PH. Punitive damages (also referred to as exemplary damages) are damages awarded against a wrongdoer as a form of punishment. The primary aim of such damages is to punish the wrongdoer and deter similar behaviour by the wrongdoer and others in the future.

The trial judge found that PH had breached the SPA by not delivering an RDU that was of merchantable quality and fit for its purpose. The trial judge also agreed with Airtrust that PH had acted fraudulently – and held that PH's conduct merited the award of punitive damages.

PH appealed the trial judge's finding on fraud and that its conduct merited punitive damages. On appeal, PH also argued that Clause 25 of the SPA limited the damages payable to Airtrust. Clause 25 of the SPA provided that "Neither party shall be liable to the other for any consequential or indirect losses… including but not limited to loss of profits… arising out of or as a result of the performance of the work..."

Key Issues

Issue Two: Whether or not the Court will recognize the award of punitive damages for a breach of contract per se (i.e. a breach of contract without any other concurrent liability, for example, in tort).

Issue Three: Whether the damages payable by PH to Airtrust is limited by Clause 25 in the SPA.

Decision

Issue One

The Court of Appeal disagreed with the trial judge's findings of fraud. The Court of Appeal held that the mistakes in the information and data submitted by PH to ABSG for the certification process could simply have been due to oversight rather than fraud. The Court of Appeal also held that there was a possibility that PH had in fact been mistaken that full ABSG certification was obtained – and did not intend to mislead Airtrust in that regard. The Court of Appeal concluded that PH's behaviour was, at most, negligent or grossly negligent.

Issue Two

Following a detailed review of the arguments and case authorities for and against the award of punitive damages, the Court of Appeal laid down the general rule that punitive damages cannot be awarded for breach of contract. Nevertheless, the Court of Appeal held that it would not rule out entirely the possibility that a case involving a particularly outrageous type of breach may necessitate a departure from this general rule.

The reasons expressed by the Court of Appeal for its unwillingness to award punitive damages include the following:

1. First, the concept of punishment and deterrence (which is the premise of punitive damages) sits uneasily with the concept of a contract. A contract is a voluntary agreement entered into between willing parties to regulate the legal relationship themselves. As such, it would be anomalous or even inappropriate for the Court to regulate parties' conduct by an external standard (i.e. standard of conduct established by the Court) through imposing an award of punitive damages on the party in breach.

2. Second, there is no need for punitive damages to fill any "remedial gap" for breach of contract. The Court considered the argument that there would be a "gap" if the Court did not have at its disposal a remedy to punish and deter those who breach their contracts in a deliberate or outrageous way.

In this regard, the Court considered that there is no gap to begin with because the purpose of damages for breach of contract is not to punish. However, even if there is such a "gap", it can be filled by alternative remedies which target deliberate breaches of contract and arguably have punitive or deterrent effects. Such alternative remedies would include "Wrotham Park damages" (i.e. damages quantified by reference to the sum of money which the plaintiff could have reasonably demanded in return for permitting the defendant to breach a restrictive covenant or other legal restriction) and account of profits (i.e. damages awarded to a plaintiff based on the defendant's gains or profits).

3. Third, imposing an award of punitive damages for breach of contract would harm commercial stability. The doctrine of efficient breach dictates that a contractual breach should be permitted if limited resources can be re-allocated more efficiently. An award of punitive damages would, however, discourage efficient breach of contracts – and would lead to economic inefficiencies.

4. Fourth, from a policy perspective, awarding punitive damages for breach of contract may add to the length, complexity and costs of litigation – and confer upon plaintiffs an undue advantage in extracting large settlements. Also, to the extent that punitive damages are awarded in particular types of contracts or specific industries where there is heightened risk of recurrent or reprehensible conduct – this would be more appropriately managed by regulations rather than judicial remedies.

Issue Three

On an interpretation of Clause 25, the Court of Appeal concluded that Clause 25 excluded Airtrust's claim against PH for consequential losses suffered by it arising out of the defective performance of the SPA. The Court of Appeal further held that Airtrust's claims for lost rental profits and lost opportunities to earn further profits are consequential and indirect losses which would be excluded by Clause 25.

Comment

This case is significant for laying down the general rule that punitive damages cannot be awarded for breach of contract in Singapore, although "a particularly outrageous type of breach" may necessitate departure from the general rule.

In this regard, plaintiffs should be slow to plead punitive damages for breach of contract unless the breaches by the defendants are "particularly outrageous". In such circumstances, the plaintiffs would have the surmount the many reasons set out by the Court for its reluctance to award punitive damages.

Additionally, given that punitive damages are available in tort, plaintiffs seeking to recover punitive damages may well be advised to consider whether it also has a concurrent cause of action in tort – and, if so, to frame his claim for punitive damages in tort.

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